Payday loan bubble 'could burst'

Payday loans signThe payday loans bubble could be on the brink of bursting following accusations against the industry that it is preying on struggling borrowers, research has suggested.

Insolvency trade body R3 is predicting a dip in borrowers turning to payday lenders in the next six months, with one in 14 (7%) adults planning to take out loans, down from one in nine (11%) when a similar study took place in October.

R3 said that the drop could be down to recent negative publicity about the debt woes of some customers, although many younger people still see payday lenders as a "financial crutch".

The £2 billion sector, which has doubled in size over the last five years, has come under intense scrutiny in the last few months following a damning report by the trading watchdog.
The Office of Fair Trading (OFT) said in March that it had uncovered evidence of "widespread irresponsible lending". R3's survey of more than 2,000 people was carried out a couple of months after the OFT's report. It was published as debt charity StepChange released evidence that problem payday loan debt is soaring.

StepChange has dealt with more than 30,000 complaints about payday loan debts in 2013 so far - nearly the same number as that for the whole of last year. More than 6,600 StepChange clients this year so far have had five or more payday loan debts, which is also almost equal to the figure for the whole of 2012.

The charity said this is a "clear indication" that lenders are still failing to carry out proper affordability checks and the case for urgent reform of the industry is "overwhelming".

R3 did not specifically ask people why they were apparently more reluctant to take out a payday loan. But the trade body's president Liz Bingham suggested: "Negative publicity about the risks of payday loans may be starting to affect their popularity. However, payday and other short-term loans remain a significant financial crutch for younger age groups."

The Consumer Finance Association (CFA), which represents short-term lenders, said that payday loans offer people an "extremely flexible and simple" way of borrowing small sums of cash.

Russell Hamblin-Boone, chief executive of the CFA, said: "Both lenders and borrowers have to behave responsibly to ensure consumers do not end up with debt they cannot afford. CFA members are committed to raising standards by working with the regulator, Government, debt charities and consumer groups to protect consumers and promote good practice in order to drive out rogue lenders."